The major U.S. stock indices traded higher today, in part because the economic drag of budget deficits in Washington appears to be coming to a slow end. The federal government said it ran a $107 billion surplus in April, when many people pay taxes from the previous year. For the first seven months of the federal fiscal year, the government has run a $306 billion deficit, which is 37% lower than a year ago.
In response, the Dow Jones Industrial Average (^DJI 1.56%) was up 6.6% with broad gains across the index. It may not seem like the budget deficit has much to do with corporate America, but in a macro sense there's a huge impact. Gross domestic product growth and employment has been hampered by federal spending cuts in recent years, and even a flat budget would offer a positive impact on the economy.
On a more focused level, there may be less pressure on the government to cut military spending, which in recent years has seen major cuts that have hurt Boeing (BA 4.36%) and United Technologies (UTX 2.04%). That hope is a big reason they're both up over 1% today.
Pratt & Whitney's F135 engine powers the next generation F-35C Lightning II fighter. Source: United Technologies.
Military stocks pop
Defense spending is down 5% so far this fiscal year; while that's good for the budget, it isn't good for companies that make military goods.
Boeing saw a 13% decline in military aircraft revenue in the first quarter, and revenue was down 6% in the defense, space, and security segment. Commercial aircraft continue to drive Boeing, while the military is a drag.
A similar dynamic is playing out at United Technologies, which has seen Sikorsky helicopters struggle and saw Pratt & Whitney's revenue fall 2% in the first quarter. UTC Aerospace grew slightly in the quarter, but all three divisions have both military and commercial sales so they're not a direct reading of military segment revenue.
Sikorsky helicopters serve many branches of the military. Source: United Technologies.
If pressure on the federal budget eases -- which seems to have happened recently -- we should see military spending level out or maybe even rise in the next few years. That would be a boon for Boeing and United Technologies, which are already benefiting from a boom in global commercial flight. That hope is why their stocks are outperforming even a strong Dow today.
